What's the cost of global warming?
Doing the maths
Analysis Let us assume global warming is happening. Let us assume too that it is doing so at a rapid pace. What should we do about it?
There are two very basic approaches. Either we can attempt to mitigate the problem by direct or indirect means, or we can go with the flow, and adapt to a warmer world. Let's examine the costs and benefits of these approaches.
First, there's the "direct approach" as advocated by the Kyoto Protocols and the Stern Review. The current Kyoto proposal for 2008 to 2012 calls for greenhouse gas reduction to 5.2 per cent over 1990 levels. Unfortunately, this is not endorsed by most of the "prime offenders". The US balks at the proposal, and India and China will not even consider it. But Europe is attempting to cajole the world into compliance, so let us consider some of the details.
The most glaring problem is that the countries who are increasing their CO2 emissions most rapidly are among the world's poorest. They did not create the "problem" in the first place, but they are the ones that will pay the highest price, economically, by complying. The estimated costs of Kyoto by 2010, range from £6.2bn for the UK (or 1.1 per cent of GDP) to £17.4bn (or 3.1 per cent of GDP), the Institute Economique Molinari estimated in September 2006. Yet exceedingly affluent Sweden, already thoroughly industrialized, and having made cuts in CO2, would actually be allowed an increase in output. But Spain, even with an more lenient goal of 15 per cent above 1990 emissions by 2012, had already increased CO2 emissions by over a third from 1990 to 2001, making compliance expensive indeed.1
Enforcing these carbon reductions is problematic. Proposed solutions are an emissions tax and/or the creation of an "emission rights market". This would penalize profitable production, so that "rights" would become increasingly expensive over time. Some companies would go out of business, while many would attempt to move to countries not covered by the Kyoto treaty. As one German cement factory manager put it, "If that's the shape the trading will take, we will simply move our cement operation to Ukraine. Then there won't be any trading here, nothing will be produced here anymore - the lights will simply go out here."2. From 2013, the price of carbon offsets for the German cement industry is estimated to be around half of current revenues.
Even if the period for implementing Kyoto proposals was extended to 2100, temperatures would only be only 0.15°C to 0.21°C lower (c. +2.3°C higher from 1990 to 2100) according to Dr M L Wigley, senior scientist at the University Corporation for Atmospheric Research (UCAR). With all its costs, Kyoto would delay global warming by only six years.3
The Kyoto Protocols are clearly costly to all involved, do little to mitigate warming, and place the heaviest obligations on those countries that can least afford it. Therefore it seems unlikely that these goals will ever be met. The poorer countries simply can't comply, and the richer countries simply won't. And any country that made a good-faith effort would in effect, be victimized economically by those which did not.
Let us now turn to the Review of Sir Nicholas Stern, which has been stirring controversy ever since it was released in 2006. The Stern Review, like Kyoto, favours immediate measures, but looks further into the future. However, even believers in the theory that human CO2 emissions are the primary factor in global warming take issue with Stern's numbers.
Stern asserts that the economic cost of global warming will in 200 years be between five per cent and 20 per cent of global GDP. Stern calls for a CO2 stabilization at 550 parts per million (ppm) by 2050. The current level is 385 ppm. Stern estimates that this would limit the temperature increase to between 2C and 3C/ The cost would be about one per cent of world GDP 4. This cost is comparable with that of the Kyoto protocol, but would be applied worldwide, not just by signatories to the treaty.
Stern takes the worst temperature scenario of a range published by the IPCC. He projects a temperature increase of at least 4°C and possibly in excess of 5°C by early next century. Most of the damage would occur at the high end of the estimate 5.
The Stern Review also uses the extreme IPCC estimate of population growth (up to 15 billion) by 2100, which is far higher than the UN's estimates of under 10 billion by 2150. Projections of population growth by the UN have actually been falling 6. Nor does Stern account for the most significant factor in falling projections - prosperity. As an economy develops and health and education improve, the fertility rate declines.
Since the bulk of the increase in population is projected for the less developed countries, the human cost of global warming in terms of disease and premature death - for example, 1 million to 3 million additional deaths at +3°C from famine, and 80 million additional cases of malaria7 at +5°C over the next 75 years - is magnified by between a third and half. Stern's Malthusianism becomes a self-fulfilling prophecy.
The Stern Report also makes another curious omission.
Looking at his damage assessment estimates, one can find no account made for poorer countries being better placed to mitigate the effects of warming as they develop. There is certainly account made of increased CO2 output as development occurs, but no consideration that increased wealth, in and of itself, might reduce vulnerability. Stern counts the negatives, but ignores the positives 8.
Stern also assumes storm frequency and severity (Accumulated Cyclone Energy, or ACE) has continually worsened as climates have warmed, and that the trend will continue. But ACE has actually decreased somewhat since the 1970s. Yet Stern projects that extreme weather alone will result in an increased loss of several percent of GDP. 9
Stern also assumes a low GDP growth of 1.3 per cent. Yet even the developed US has enjoyed an average of 3 per cent growth during the last 50 years. The less-developed nations of India and China (around a third of world population) show GDP growth of between 5 per cent and 10 per cent in recent years. 10
But most controversial of all is Stern's choice of a "discount rate". This is economist lingo for how much more money is worth in the future than now: At what interest one is realistically willing to borrow it or expect from savings, or even the rate one is willing to pay for insurance. Stern rates the value of that "future dollar" to be much higher than mainstream economists. His discount rate of choice, 1.4 per cent, is extremely low - only 0.1 per cent higher than his GDP growth estimate. He is, in effect, saying that a dollar a year from now is worth 98.6 per cent of what it is worth today.
This has the effect of both magnifying the damage estimates, and the effect of money spent early to solve the problem. If you increase Stern's discount rate by as little as 1 per cent the long-term damage projections decrease by half. 11
Stern does indicate that in the name of fairness, the bulk of the direct costs should be borne by the developed nations (which would increase their share from 1 per cent to 1.8 per cent of annual GDP).
Not surprisingly, Stern's low discount rate drew criticism from a range of economists. One, Hal Varian, wrote:
"These choices together imply that a one per cent reduction in consumption today is desirable if it leads to slightly more than one per cent increase in the consumption of some future generation, even though, in the model, future generations will be much wealthier than the current generation."
"So, is it really ethical to transfer wealth from someone making $7,000 a year to someone making $94,000 a year?" Varian asked12.
Finally, if Europe cannot or will not comply with the Kyoto Protocols, how may one realistically expect compliance with the far broader scale goals advocated by the Stern Review? This call the entire question of mitigation by direct response (i.e. "carbon cuts") into serious question.
Lawson and Lomberg
Now let us look at the strategy of adaptation. Former Chancellor of the Exchequer Nigel Lawson, in his book Appeal to Reason13, which looks at direct means of adaptation and Bjorn Lomborg, head of the Copenhagen Consensus, which looks at how the proposed costs of direct mitigation might be otherwise spent have both studied the costs and benefits.
Lawson rejects the "dumb farmer" thesis that crops and methods will not change as conditions change. He points out that in reality, climate change is gradual and therefore easy to adapt to, and argues that non-directed market-driven adaptation as crises occur is the by far the most logical and economical approach. He proposes building of sea walls, for example. Lawson argues that not only is it unjust to deny poor countries the benefits of modern development, but that development itself greatly improves the ability to adapt, QED.
Lawson agrees with Stern that the effects of climate change are uncertain, but also notes that "uncertainty cuts both ways". The effects of warming might not necessarily all be negative - agriculture benefits from warmer temperatures. Lomborg adds that a recent peer-reviewed health survey estimates that IPCC-projected global warming would cause "almost 400,000 heat-related deaths". This sounds terrible, to say the least. "But", the authors continue, "at the same time, 1.8 million fewer will die from the effects of cold."
Lomberg's Copenhagen Consensus, a direct response to Kyoto, concludes that direct mitigation costs might well be much better spent on nutrition, vitamins, development, health (immunization, parasites, malaria, heart attack, tuberculosis), biofortification, education, and family planning.
One must also consider, when making any economic decision, the alternative solutions. And capping carbon emissions as advocated by Kyoto and Stern is not the only possibility of mitigation.
Perhaps the problem can be bypassed instead by present or yet-unknown technology. It is difficult to speculate about what such an advance would be, since the nature of the future is that it is unknown. But such a solution might achieve climate stability at a much lower cost than one or two years' worth of the cost of Kyoto and Stern.
Lomborg estimates that solid-fuel air pollution effects could be reduced by a third for $2.4bn. $500m would save 500,000 lives per year, mostly children, lost to malaria. $200m for cheap drugs for poor countries would save 300,000 per year. Spending on education in poor countries would increase earnings by a factor of four. From the disease prevention/treatment portion alone, the proposals of the Copenhagen Consensus would save an estimated 3.8 million lives in four years.
Direct benefits from $800bn spent on direct mitigation of global warming would yield only 90 cents' benefit per dollar. In the UK alone, the government has granted carbon credits worth some $20bn.
The resources diverted to direct mitigation of global warming might be much better spent. ®
1 Margo Thorning, Park Leopold, Rue Wiertz: Kyoto Protocol and Beyond, Institute Molinari
2 Karsten Stumm: The EU's Carbon Trading Scheme, Killing Jobs to Save the Climate Der Spiegel, 7/17/08
3 Tom ML Wigley: The Kyoto Protocol: CO2, CH4 and Climate Implications, Geophysical Research Letter, 1998
5 Ibid., Part 1, p. 9ff
6 The Stern Review: an assessment of its methodology, xi Australian Government Productivity Commission,
7 Stern, p61 United Nations, The World at Six Billion, 2004, p. 5, 6
10Jerry Taylor and Peter Van Doren: Global Warming Insurance is a Bad Buy in National Review, 23/11/2006.
12 Hal Varian: Recalculating the Costs of Global Climate Change in The New York Times, 14/12/2006.
13 Nigel Lawson: An Appeal to Reason: The Economics and Politics of Climate Change, Center for Policy Studies [PDF, 101kb], 2006 and An Appeal To Reason: A Cool Look At Global Warming (Duckworth) 2008.
14 Bjorn Lomborg: The Other View on Global Warming, Environmental policy should rediscover the middle ground, p2